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Tuesday, February 12, 2008

Cost Benefit Analysis-Six Sigma tools

So what is Cost Benefit Analysis tools in Six Sigma really all about? The following report includes some fascinating information about Cost Benefit Analysis and Six Sigma--info you can use, not just the old stuff they used to tell you.

It seems like new information is discovered about something every day. And the topic of Cost Benefit Analysis-Six Sigma is no exception. Keep reading to get more fresh news about Cost Benefit Analysis.

Cost-benefit analysis is a particular term, which refers both to:

* An informal approach to making decisions of any kind. * A formal discipline used to help appraise, or assess, the case for a project or proposal, which itself is a process known as project appraisal.

The process under both definitions involves, either explicitly or implicitly, weighing total costs expected against total expected benefits for one or more of these actions so as to choose the most profitable option.

The formal process is often named CBA, or Cost-Benefit analysis in the United States.Other closely linked but slightly different formal techniques feature cost-effectiveness analysis as well as benefit effectiveness analysis.

Cost Benefit Analysis is actually an economic tool which aids in the process of social decision-making, and is used by governments evaluating the usage or effectivity of a given intervention in the market. The overall aim is gauging the efficiency of intervention relative to status quo. Costs as well as benefits of intervention are calculated in terms of the people's willingness to pay for these benefits or their willingness to pay in order to avoid the costs. The inputs are measured through opportunity costs and their value in the best alternative use. The overall guiding principle is listing all parties affected by the intervention, and placing a monetary value for the effect they have on welfare as it is valued by them.

In the process of cost-benefit analysis, the monetary based values may be assigned to the less tangible effects including various risks which can contribute to partial or even total project failure; along with loss of market penetration, reputation, long-term enterprise strategy alignments, etc. This is specially true for those situaitons when governments use the method, for example to decide whether to bring in business regulations, as well as build new road or offering new drugs on state health care. In these cases, a value has to be put on human life or environment, which often causes great controversy. Cost-benefit principle says, for instance, that we have to install guardrails over a dangerous stretch of mountain road, if the cost for doing so is less than the implicit cost of injuries, deaths, and property damage which may thus be prevented.

This process involves cost based value of initial as well as ongoing expenses against the expected returns. Constructing such plausible measures of benefits and costs of specific actions is very difficult. In reality, the analysts estimate costs and benefits by applying survey methods or drawing inferences from the general market behavior. Cost-benefit analysis does attempt to put relevant costs and benefits on the common footing. A discount rate is first chosen, and it is then used to calculate all future costs and benefits according to present-value terms. Most commonly, discount rate used for current value calculations is actually an interest rate adopted from financial markets, which can be very controversial. For instance, a high discount rate means very low value on welfare of coming generations, which tends to have a huge impact on the overall effectivity of interventions over the environment, etc. Such empirical studies suggest that actually, peoples' discount rates decline in course of time. Since CBA aims at measuring true willingness of people to pay up, it is typically built into studies.

The cost-benefit calculations involve using time based value for money formula. It is usually performed by converting future expected costs and benefits to current value amounts.

There's a lot to understand about Cost Benefit Analysis-Six Sigma. We were able to provide you with some of the facts above, but there is still plenty more to write about in subsequent articles.